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Russia Pivots to China as Sanctions Bite

The search for alternative investors and markets has been a political priority for President Vladimir Putin since western countries imposed economic sanctions on Russia last year. The resulting pivot to China may seem merely cosmetic, but it is happening. China has become one of the two biggest sources of funding and investment for the Russian economy. The Chinese share of Russian trade is growing, too.

Russia received only $21 billion in net foreign direct investment last year, compared with $69.2 billion in 2013. Most of the money came from offshore havens such as Cyprus, the Bahamas and the British Virgin Islands. Among non-offshore source countries, China, with its $1.3 billion in direct investment, was second only to France. That’s a tiny amount, but a sign of change: In previous years, Chinese investment never exceeded $450 million, Bloomberg reported.

At the same time, Chinese loans became by far the biggest source of foreign financing for the Russian economy last year. According to Central Bank data, Russia’s non-financial sector and households received $11.6 billion in net new loans from China. Cyprus—or rather Russian businesses operating in Cyprus—was the second-biggest lender, with $3.4 billion.

This presents a radically different picture compared with just two years ago. In 2013, the UK dominated lending to Russia with $23 billion in net new loans; China contributed $7.5 billion.

This year, there will probably be another jump in Chinese loans, thanks to a deal that allows Russian companies to raise $25 billion from Chinese banks against Russian government guarantees. Much of the Chinese lending is going to Russian oil companies, especially to state-controlled Rosneft, which has been forced by western sanctions to tap the government’s reserve funds.

In May, Russia sent 930,000 barrels of oil per day to China, overtaking Saudi Arabia in that market for the first time. Although the groundwork for this market share gain was laid before the western attempt to isolate Russia, Rosneft might have been less willing to send as much oil to China if it weren’t for the shift in financing opportunities.

Russia’s trade with China has fallen as the economy has stagnated, but the drop has been smaller than with other major trading partners, in part due to the boost in oil exports.

Another area in which Russia needs Chinese funding and technology is infrastructure. This month, the state-controlled China Railway Group signed a contract with the Russian railroad monopoly to design a high-speed rail link between Moscow and Kazan. Russia then wants to extend the network to Beijing, reducing the length of the trip between the two capitals to 48 hours, from seven days.